The Italian 2014 Labor Market Reform: Design and Process of Relevance to Poland1 Introduction The Polish labor market has long been affected by duality (or segmentation) in the contractual conditions of workers: in 2015, 90 percent of net employment creation occurred with temporary (rather than permanent) contracts. Of these temporary jobs, nearly half are regulated under civil law rather than labor law. Such duality is explained by the profound differences in costs and benefits associated with different contract types, in terms of employment protection, rights such as sick leave and vacation days, and social security contributions. The legislation today lacks clarity on the scope of application of different contractual regimes: this implies that in Poland the type of contract that a worker receives largely depends on his or her bargaining power with employers, rather than on the nature of the job. Furthermore, there is evidence of limited mobility of workers between different contractual forms, leading to structural wage inequalities. Persistent duality is associated with a widespread sense of unfairness. The centrality of labor market duality in today’s political debate is due to the fact that temporary employment, although increasing, continues to be perceived as undesirable2. Hence, the deep segmentation between those workers who have more rights and jobs security, and those who do not, is perceived as unfair, particularly if specific socioeconomic groups tend to be over-represented among the precarious workers. However, clear evidence on the effect of dual labor markets on firms productivity is still developing. In regimes when permanent contracts are perceived as being too rigid or risky, liberalization of temporary contracts have produced positive effects on employment and productivity gains; critics of duality, however, found that the abuse temporary contract due to the high perceived costs of open-ended contracts leads firms to under-inves in firm-specific human capital; high turnover has also been found to reduce worker’s motivation and effort3. In an attempt to provide a comparative perspective for the ongoing rewriting (‘codification’) of the labor code in Poland, this paper explores the recent reforms of the labor code in Italy (the Fornero Law and subsequent Jobs Act, 2013–2015). Duality is not unique to Poland in Europe. Italy’s labor market has long been recognized as deeply segmented between well-protected ‘insiders’ and precarious ‘outsiders’. The Italian reform is of interest to Poland given the similarity in the challenges and the innovative nature of the solutions. The paper tries to draw direct comparisons between these legal changes and Polish labor regulations, as well as the processes to achieve these results. Although the Italian case arguably represents the most far-reaching reform to reduce duality since the 2009 economic crisis, other countries including Estonia, Spain, Slovenia and the Netherlands have carried out reforms with the same objective, especially via the liberalization of open-ended contracts or the reduction in the cost of dismissal. A review of these experiences can be found in (OECD 2016). 1 Acknowledgments: This paper was prepared as part of the Poland Labor Market and Social Policy Technical Assistance of the World Bank. The paper was prepared by a team composed of Matteo Morgandi, Claudia Oriolo, Wojciech Sacha and Roberta Gatti, based on two background papers prepared by Pietro Ichino, Claudia Oriolo and Roberta Gatti (on the case of Italy), and by Piotr Grzebyk (on the case of Poland). The team is thankful to Prof. Milan Vodopivec and Truman Packard for peer reviewing this paper. 2 See for instance qualitative work conducted in Goraus, Gatti, and Morgandi (2014) 3 (Alonso-Borrego (2014) (Bentolila, Dolado and Jimeno, 2011), (Dolado, Ortigueira and Stucchi,2013). 1 Taken as a whole, the Italian reforms was meant to introduce new instruments that would strike a better balance between employment protection and guaranteeing a minimum set of rights for most workers. In particular, all the changes were meant to increase incentives for employers to hire on open-ended contracts, while reducing the cost of doing so. Moreover, several measures were introduced to accelerate employers’ adoption of these new instruments among the existing stock of workers. In particular: (i) a new open-ended contract offering ‘rising levels of protection’ (‘Contratto a Tutele Crescenti’) replaced the existing “contratto a tempo indeterminato� for any new open-ended work relationship; this contract guarantees a minimum set of rights (vacation, sick leave, access to unemployment insurance), severance pay proportional to tenure in case of dismissal for economic reasons, and an established maximum monetary indemnification of the worker for any other form of unjust dismissal. (ii) the traditional very protective open-ended contract was “grandfathered� and maintained for the existing stock of workers, who continue to enjoy the possibility of reinstatement (plus indemnification) if dismissed unjustly. (iii) employers were given tax incentives to hire new workers (or convert the existing ones) to the new open-ended contract with increasing protection. (iv) all other forms of precarious freelance contract (similar to civil law contracts in Poland), were either abolished or narrowed down in scope, with heavy penalties if used by employers to hire de- facto dependent employees (and a new simpler test to determine who is a dependent employee). (v) In order to contrast informality, the law also introduced pre-paid vouchers to compensate employees in casual or seasonal jobs (up to a maximum compensation of per year). (vi) Finally, the reform overhauled the system of income protection of the unemployed, especaially by extending unemployment insurance rights to many categories of workers formerly uncovered: this was a critical step to improve security in a context of increased easiness of dismissal. In parallel, a ‘Labor Code Simplification Commission’ drew from the contribution of over 200 labor lawyers to identify all norms related to the regulation of labor, scattered across many pieces of legislations and amendments. The commission synthetized the existing body of law in 70 articles, with the idea of making the labor code and easier to understand and apply and translatable in foreign languages. 1. Labor market duality – a common symptom of fragmented labor regulations in Italy and Poland 1.1 Italy before the Jobs Act: key feature of the labor market regulations from the 1970s to 2013 Before the recent reform, better known as Jobs Act,4 Italy represented one of the most prominent examples of labor market dualism, both from the legal point of view and in terms of outcomes. From the legal point of view, in 2013 Italy ranked as the third highest OECD country in terms of level of protection from dismissal of permanent workers, and eight highest for dismissal of temporary workers (OECD 2016b). In 2013, only 16 percent of new hires were under an open-ended contract. Another 16 percent worked on atypical work contracts (such as free-lance “project� contracts), while the overwhelming majority (68 percent) was hired on temporary labor contracts (Ichino 2016). Labor market segmentation primarily originated from the legislators’ choice to use temporary and atypical contracts as a way to increase labor flexibility on the margin and in periods of high 4 Law no. 183/2014 and eight implementing decrees entered into force in 2015. 2 unemployment; while maintaining intact all the rights of the existing stock of permanent workers, especially protection against dismissal without just cause in firms with more than 14 employees. This fragmented legislation was essentially the result of a political compromise meant to respond to the demand of employers, without dismantling the acquired rights of unionized workers. As such, the proliferation of fixed-term and atypical contracts—accompanied by inferior working conditions and lower labor security—finds its roots in the nature of social dialogue, which particularly hurt the typical ‘outsiders’: women, youth, and long-term unemployed. In the aftermath of the global financial crisis, Italy was—and to a certain extent still is—in the grip of sluggish economic growth and high unemployment rate. Doomed by stagnant productivity (EU Commission 2015) and declining competitiveness since early 2000 (EU Commission 2015), between 2007 and 2013 the country witnessed a steep decline in real gross domestic product (GDP), ranking at an average annual growth rate of −1.4 percent compared to an average of −0.1 percent in the Euro Area. In the same time span, employment rate plummeted by 3 percentage points from 62.7 percent to 59.7percent, while the unemployment rate almost doubled from 6.1 percent to 12.1 percent (Ministry of Labor and Social Policy, Italy 2015). After reaching its peak of 13 percent in November 2014, unemployment decreased to 12.4 percent in May 2015. Youth, women, and those from the southern regions suffered the most from employment shortage: youth unemployment reached an unprecedented peak of 42.4 percent in January 2014 (Crepaldi, Pesce, Lodovici, 2014). In fact, more than one in four persons ages 29 years or younger was inactive, meaning neither in employment nor in education or training (Not in Education, Employment or Training [NEET]). Among the EU countries, Italy ranked among the highest in youth unemployment (OECD, 2016). Domestic recovery from the economic downturn encountered a variety of structural barriers. When the global crisis hit, Italy did not manage to adjust its productive and industrial system to the newly posed challenges. The national economy suffered from fiscal and economic contraction, while foreign capital and investment streams dropped. Owing to a sudden and massive drop in business volume, Italian firms felt compelled to reduce their labor input. Dismissed employees as well as inactive and discouraged youth began to miss the opportunity to develop skills, competencies, and expertise. All these factors combined set the ground for an exceptionally disrupted labor system, with a ‘lost’ generation, stark intergenerational clashes, and high outward migration rates. With regard to legislation, labor reforms in Italy brought to a gradual deregulation the use of temporary contracts of many types, while maintaining the legacy of stringent dismissal rules and associated benefits for workers on open-ended contracts intact. As a result, a dual labor market took hold: a significant share of temporary and less protected contracts began to coexist alongside a shrinking number of open-ended contracts with higher employment security. Some experts convened to describe the labor law reform process as marginal—being applicable only to new jobs— and asymmetric - making more flexible use of temporary contracts while keeping open-ended contracts unchanged- (Garibaldi and Taddei 2013), with an impact on a limited fraction of the overall labor force. 3 Figure 1: Key legislative reforms of the labor code in Italy since the 1970s • Protection JOBS ACT • Clampdown of employees ’ TREU Law on widespread privacy and (1997), 20111 183/2014 abuses of political BIAGI Reform flexible work liberty… (2003) • Introduction of the contracts • …and of Open ended • Overcoming trade unions contract with • Flexibilization rigidity of activity in increasing levels of at the margin : dismissals work -places protection temporary discipline • Rigid work, part - • Strengthening • A new Protection time, job unemployment unemployme against sharing etc. benefit system nt social unlawful benefit • Empl services and dismissal Active policies to system (Article 18) foster inclusion into FORNERO the labor force STATUTE OF LABOR REFORM Law 300/1970 Law 92/2012 Source: Ichino 2016. After the introduction of the Statute of Workers in 1970, the most relevant phases of labor law reform that paved the way for labor market duality are represented by the 1997 “Treu5 Reform�, 2001 Labor Reform, and 2003 “Biagi6 Reform� (see Figure 1). • The 1997 reform, better known as 1997 Pacchetto Treu, loosened the regulation on the conversion of fixed-term contracts into open-ended ones to a large extent. The sanctions that applied to employers for using fixed-term contracts incorrectly were substantially reduced. Furthermore, the Treu Bill eased the regulation on apprenticeships, work-training contracts, on- the-job trainings, temporary work via private agencies, and intraregional labor mobility. • The 2001 reform led to an additional liberalization of fixed-term and temporary contracts. As a consequence,, temporary contracts—including part-time contracts—were always allowed as long as the rationale (clear motivation) for their use was explicitly set out in writing. • The 2003 ‘Legge Biagi’ introduced a wide range of new ‘atypical’ temporary contracts. The most dominant feature of this reform was to introduce several new types of atypical contracts, among which the so-called task–related contract (contratto a progetto) started to acquire a dominant role in the Italian labor market. De jure, a ‘contratto a progetto’ refers to a fixed-term labor service provided by a self-employed hired to perform a specific task, limited in scope and time. De facto, these contractual agreements became a dominant employment scheme of fixed-term 5Tiziano Treu, Minister of Labor from 1995 to 1998. 6Italian labor lawyer Professor Marco Biagi was assassinated in 2002 by the terrorist group Brigate Rosse (Red Brigades). 4 relationships of new entrants. A large number of workers were ultimately required to perform tasks similar to regular employees, but under lower level of protection and social benefits. In this context, the Italian labor market also experienced an extensive abuse of bogus self-employment. In Italy, the self-employed acquire a value added tax (VAT) registration number (Partita IVA) to issue invoices to their clients. They are usually independent consultants who perform a variety of tasks with full flexibility in the organization, but are subject to very limited labor law protection. However, in practice, freelancers were often hired to perform the same functions as open-ended colleagues, but with no benefits or job security as guaranteed under open-ended contractual regimes. The initial success of flexible contracts was soon called into question because of what is defined as the “honeymoon effect� of marginal reforms (Boeri and Garibaldi 2007). In a dual labor system, employers highly benefit from the opportunity to hire workers through more convenient and flexible temporary contracts. This scheme proved to work well in times of economic expansion, thus boosting employment especially among youth. However, with the advent of an economic crisis, temporary jobs were the first ones to be wiped out. Company-level adjustments did not occur according to the logic of restoring firm competitiveness by retaining necessarily the most productive staff , but rather they were driven by the contractual form of staff, and biased against the typical profiles of workers in such contracts: young people, women, and immigrants (Garibaldi and Taddei 2013). 1.2. Labor market duality in Poland and its main legislative causes Evidence of labor market duality in Poland The current labor code in Poland dates back to 1974. Largely inherited from the planned economy period, the labor code was subject to innumerable amendments to its original articles over the following four decades, without ever undergoing any organic reform. Similar to the case of Italy, employers have reported that the labor code in force to date in Poland is an overly complex body of law, of difficult interpretation and with several ‘gray areas’ that remain open to legal uncertainty.7 A distinctive feature of labor law in Poland is the fact that workers can be hired either through labor law contracts (governed by the labor code) or through civil law contracts. The key features of these contracts are summarized in Table 1. From the early 2000s, civil law contract started to become increasingly popular as a way to hire workers, especially those who are low skilled or first-time labor market entrants. These forms of contract were always part of the labor code, but traditionally they were used mostly to frame casual work relations such as odd jobs and part-time work of students. To our knowledge, there is no conclusive explanation for the rise in civil law contracts. At the same time, the country faced a growing unemployment rate during the 2002 recession (from 15 percent in 1996 to 20 percent in 2002), which increased pressure on firms to reduce input costs, including labor costs, and increase their flexibility to respond to economic cycles. Faced with the rigidity of labor law, employers started to reduce their offer of open-ended employment contracts to new hires. 7A simple summary of the main terms of labor regulations in Poland can be found at http://www.paiz.gov.pl/polish_law/labour_regulations. 5 Figure 2: Taxonomy of work relations in Poland Self- Dependent employment employment Labor code contracts Civil law contracts Contract for Commission a specified Permanent contract Fixed term contracts task contracts (umowa (umowa o zlecenia) dzieło) Contract for Contract for the time of Contract for Temporary a fixed completion period of specified a trial period employment task Source: Goraus et Al. 2014 Table 1: Key rights and benefits associated with different types of contracts Labor code Civil contracts Benefits and contracts Commission contract Contract of result rights of (open (umowa zlecenie) (umowa o dzieło) workers ended or fixed term) 65% of all non standard contracts 9.9% of all non standard contracts* Social Yes Yes (at least from the level of No security minimum wage since 2016 ) Contributions Health Yes Yes No (could be done voluntarily, subject insurance to payment of extra contribution) Holidays Yes No No (unless agreed upon) Minimum Yes Yes (at hourly minimum wage, since No wage 2017) Period of Yes No No notice (unless agreed upon) Sick leave Yes Voluntary, subject to extra No contribution and in limited form of sick/maternity benefit (if the contract expires during maternity/sickness it is not prolonged upon return) Note: * Estimates based on Polish LFS 2015. Atypical contracts include civil law, self-employed service contracts, and “other� types of civil law contracts. 6 The prevailing theory is that from the early 2000s Polish firms became subject to strong competitive pressures, due to the entry in the Common European Market and increasing economic liberalizations. Other available legal forms to regulate dependent employment became prevalent. Initially, the proliferation of temporary employment was tolerated by the state as it was accompanied by a reduction of extremely high unemployment. However, during 2000–2015, the impressive net job creation of 2.2 million jobs was matched by an equal growth in the number of temporary contracts; the net change in the number of open-ended contracts on the other hand was close to zero over 15 years.8 These changes, when decomposed by sector, reveal that open-ended contracts grew in absolute numbers in the service economy (especially in the high-end services), but this growth was offset by a strong decline in open- ended contracts in industry, where net employment growth was entirely through temporary contracts. As a result, in 2015 the Polish labor market was deeply segmented. In 2015, Poland manifested the highest share of temporary contracts in the EU: 28 percent of the employees, compared to EU-wide average of 13.7 percent. Atypical contracts are highest among youth (15-24) and workers aged 60+; among the 60+, in about a quarter of cases the type of contract is voluntary. Figure 3: Temporary employment in Poland Source: World Bank 2017, based on LFS 2015. Root causes of duality Two sets of motivation seem to explain the ongoing persistence of temporary contracts (especially civil law contracts), with respect to open-ended contracts as the dominant form of hiring workers: (a) difference in economic cost and (b) regulatory advantages (Goraus et al. 2014). 1. Differential in economic costs Labor contracts are subject to a relatively high tax wedge, with social insurance contributions applicable in equal share to all wages (up to a cap). In contrast, throughout the 2000s civil law contracts were not subject to obligatory social contributions. Later on commission contracts became subject to compulsory contributions, but a loophole in the legislation allowed de facto to easily circumvent this, because only the first of many contracts in the calendar year was subject to this obligation. This created a strong economic incentive to use civil law contracts for jobs formerly performed under an employment contract. 8 Gatti et al (2014) based on LFS data. 7 Public tenders in the public sector have exacerbated this segmentation. Public procurement amounts to 8 percent of GDP. Bidders are chosen always according to the lowest price offered, while forms of employment used by bidders are not taken into account. Lower taxation of civil law contracts and their exemption from labor code and minimum wage regulation forced bidders to avoid employment contracts in order to remain competitive. As a result, whole sectors, for example, construction industry or maintenance services, switched to atypical forms of employment. A third element that separates the economic costs of civil and labor contracts relates to the application of minimum wage regulation. Until very recently, civil law contracts were not subject to minimum wage because they did not specify the number of hours (effort) associated with a specific task, and de facto would allow employers to hire workers for lower hourly wages than the minimum wage. Last but not least, firing costs, especially their unpredictability, are often mentioned by employers as a deterring factor to the use of open-ended contracts. Grounds for termination of an open-ended contract are subject to court review. If challenged successfully, the employer may be obliged to reinstate the employee and/or pay compensation for the damages incurred, similar to the situation in Italy before the reform.9 While severance payment is clearly quantified in the labor code, the amount of maximum damages awarded to workers for unfair dismissal through a civil lawsuit is not regulated; this rises an employer’s risks and encourages litigation instead of amicable resolution. Also, the labor code precludes the transformation of open-ended contracts into fixed-term. By using fixed-term employment contracts, the employer avoids risks related to termination,10 even if this as a whole comes at the expense of workers and potentially also of productivity in the firm. 2. Complexity of the labor code compared to the civil law regime Many employers, rather than cost, cite as their main motivation to use civil law contracts as means to avoid the complexity of the labor code.11 In fact there are several aspects in the Polish legal environment that discourage use of open-ended employment contracts The 1974 Labor Code is perceived as very complex. Similar to the Italian case, the Polish code has been amended in parts numerous times (more than 40), especially since 1989. Today, its correct interpretation requires experts to be abreast of all the extensive ancillary legislation, as well as the wide heritage of sometimes-divergent jurisprudence.12. On the other hand, the legislation governing civil law contracts relations is perceived to be simpler and with fewer attached obligations to employers. The 1974 Labor Code is also considered over deterministic on the organization of work. It contains a very detailed regulation of working conditions, including work time, health, and safety obligations. A distinct feature that separates this from other countries is that none of these working conditions can be subject to collective bargaining; instead, the prevailing principle is that the labor code serves as a minimum standard for any collective agreement. As a result, employers are discouraged from entering collective bargaining and adopting sector-specific arrangements, which could be better fitted to sectors’ characteristics, because none of the usual bargaining elements, other than wages, is negotiable. 9 Decision of the Constitutional Tribunal in case SK/18.05 from November 27, 2007. 10 Decision of the Constitutional Tribunal in case P 48/07 from December 2, 2008. 11 Panel interviews of World Bank staff. 12 International Labour Organization (ILO) labor law database (Nat Lex) records a total of 41 legislative amendments to the Polish 1974 Labor Code basic text, and 50 implemenation legislations for specific articles of the code. This excludes the body of law that regulates civil law contracts. 8 3. Unclear regulation regarding the applicability of civil and labor contracts From the legal point of view, today the use of temporary employment in Poland can be divided into three categories: • Legitimate use of specific temporary contracts: Fixed-term employment contracts for temporary or entry-level positions, civil contracts for actual freelancers, and self-employment for nondependent entrepreneurs • Voluntary use of civil law contracts or bogus self-employment for disguised employment relationships: In this category, employees made more or less a conscious decision that they prefer higher wage over social and labor protection of an employment contract • Forced temporary employment: Employment was conditional on accepting a particular atypical form of employment Throughout years, the legal framework in Poland effectively allowed dependent employment to be conducted under various legal arrangements, subject to the will of the parties. Without a clear legal distinction as to when civil rather than labor law should frame an employment relation, the type of contract chosen by an employer became dependent on the bargaining power of the employee. The cases in which civil law contracts can govern an employment relationship are not clearly defined in the law, and they have been subject to two (difficult to reconcile) lines of jurisprudence. In a landmark case in 2004,13 which was upheld by the Constitutional Tribunal, the court declared that civil law contracts do not infringe the constitutional principle of protection of labor, and it gave priority to the will of the parties. The ensuing line of jurisprudence is considered problematic because it blurs the distinction between the cases when labor law, rather than civil law, should be applied. In practice, this interpretation effectively deprives employees of the protection of the labor code, even if they are the weaker party. The second—competing—line of the Supreme Court’s jurisprudence puts emphasis on the features of a dependent employment relationship (and not parties’ will or interests) as the test to define which legal regime should apply.14 Empirical study shows that both lines of jurisprudence are applied in practice by district court judges who deliver final decisions in the majority of cases.15 As a result, there is a high level of legal uncertainty. Practical effects of blurred delimitation between civil law and labor law in Poland can be observed through empirical studies: in as much as 17 percent of cases in which the employee asked the court to establish existence of employment, the parties had previously used a labor contract that was later converted into a civil law contract.16 With regard to fixed-term labor contracts, until recently neither legislation nor jurisprudence introduced effective limitations to their use instead of open-ended contracts. Until the amendment of the labor code that entered into force in February 2016, fixed-term contracts could be renewed without limitations. What was also paradoxical in Polish labor code is that fixed-term employees could be easily dismissed not only at the time of their contract’s expiration but also throughout the duration of the contract. In particular, fixed-term employment contracts could be terminated without giving grounds for dismissal and with no obligation to consult trade unions and with only a two-week notice period, if 13 Decision of the Supreme Court of October 7, 2004, II PK 29/04, OSNP 2005, nr 7, pos. 97: “determination that work was conducted under civil law contract does not infrigne art. 24 of the Constitution, and diverse legal situations of employee and of a party of a civil contract does not infringe art. 32 of the Constitution.� 14 SN. 15 Grzebyk study. 16 Grzebyk study. 9 this was stipulated in the contract by the parties. The only limitation to the maximum length of a fixed- term contract consisted of a number of Supreme Court’s decisions17 (which serve as a good example of the lack of clarity surrounding the legislation). The impact of those decisions was, however, rather limited, because their application would require an employee to be aware of the jurisprudence and to attempt proving the wrong received in court. In practice, many employers continued to offer long-term fixed-term contracts instead of open-ended contracts, in light of the greater easiness of dismissal throughout the employment relation. 4. Low level of compliance and ineffective enforcement mechanisms Dependent employment in Poland is also characterized by a poor correspondence between law in action and law in the books. The annual reports of the Labor Inspectorate demonstrate that there is systemic noncompliance. In 2015, labor inspectors found that 26.7 percent of civil law contracts reviewed were in fact disguised employment. Because of their intervention, employers signed 8,300 civil law contracts into open-ended labor contracts on the spot.18 High rate of disguised employment is also visible in court proceedings, which in the majority of cases are instigated by the employees only after termination of over one-year long employment.19 The most remarkable example illustrating high level of incompliance is the so-called ‘first-day-at-work syndrome’. Until the recent amendment of the labor code in September 2016, it was allowed to sign a written labor contract until the end of the employee’s first day at work. Only in 2015 over 10,000 employment contracts were signed on the very day of arrival of the Labor Inspectorate to the workplace. The final resort of the parties—litigation—is often not used and does not provide effective protection. Employers and workers do not have access to speedy and efficient mechanisms for settling disputes, with an average time of around one-year to obtain first instance decisions on establishment of existence of employment relationship. Trade unions are also generally absent in those proceedings. 2. Reforming labor law in Italy and Poland 2.1 Polish labor law reforms The need for modernization and consolidation of labor regulation was broadly recognized in the 1990s. Despite multiple and significant amendments which followed the transition from communist to market economy in 1989, the labor code has never been fully adapted to the principles of a new social and political system.20 The punctual changes did not have systemic character, did not cover all necessary aspects, and very often were only motivated by the economic or political situation at the time. The Supreme Court’s jurisprudence often provided clarification and necessary adjustment to the new reality, but at the same time piled up the complexity of the labor law. The ‘honeymoon period’ for temporary employment in Poland ended only recently, when its downsides were presented more in public debate. Once the high structural unemployment dropped, it became clear that growing labor market dualism is not only unfair but also contributes to social exclusion (World Bank 2015). In recent years, the Government realized that it is also unsustainable from the perspective 17 In 2005, in case II PK 294/04, the Supreme Court found that conclusion of a nine-year fixed-term contract with a two-week notice period is abusive. In another decision from October 25, 2007 (II PK 49/07), the Supreme Court took the same view with regard to a five-year fixed-term contract, if there is no objective justification for the temporary character of the position. 18 Labor Inspectorate annual report 2015. 19 Grzebyk study. 20 Justification for the project of Individual Labor Code 2006. 10 of tax, and pension systems (Lewandoski et al. 2017), and might undermine the future economic growth of Poland through lack of investment in human capital and continuous brain drain. The first attempt to reform the labor code: ‘The Codification Commission 2002–2006’ The ‘Codification Commission on Labor Law’ was established in 2002 at the initiative of the Minister of Labor and Social Policy Jerzy Hausner. The commission, chaired by Professor Michał Seweryński, comprised prominent labor law academics appointed by the Government and acted as an autonomous body of experts. During its four-year term, the commission prepared two drafts: an individual and a collective labor code. First, the draft codes were presented in October 2005 to Prime Minister Marek Belka (Democratic Left Alliance) who was stepping down. Later, the final drafts were officially submitted to Prime Minister Jarosław Kaczyński (Law and Justice) in December 2006. Eventually, the proposal was not submitted to the parliament because of a coalition crisis and early parliamentary elections in 2007. Finally, Donald Tusk’s Government (Civic Platform) took some steps to resurrect the project, but with limited progress because of more urgent priorities brought by the 2008 global economic crisis. The unfortunate timing, combined with lack of political will to tackle the status quo, and limited support from social partners (both employers and trade unions) effectively buried the reform process. The proposals of the Seweryński’s Codification Commission were a first attempt to address labor market duality in Poland. It should, however, be said that the negative effects (and popular distaste) for the civil law contracts were far less pronounced and documented at the time. To address the abuse of fixed-term labor contracts, the 2006 draft code proposed a maximum three-year cap for contracts with the same employer. Second, though the code did not limit the use of civil contract for dependent employment, it offered elementary protection of civil law employees: obligatory notice period for commission contracts (one-week notice during the first year, two-week notice in the following years) and right to unpaid holiday and maternity leave. Importantly, the commission seemed to acknowledge that increasing restrictions on the use of term contracts had to be matched by a reduction in uncertainties and costs associated with open-ended labor contracts. The commission proposed to make open-ended labor contracts more appealing to employers by limiting the risks associated with termination of employment. The code proposed nine months’ wages as fixed compensation for unfair dismissal, which the employer could choose instead of reinstatement of the employee. Recent piecemeal interventions to address duality As of today, some key drivers of labor market duality in Poland remain in place, including an ineffective legal framework and economic incentives to avoid employment contracts. However, in the past three years, both the Civil Platform Government and the incumbent Government made some piecemeal changes to the law aimed at tackling the proliferation of temporary employment. Putting a cap on fixed-term employment In the 2000s, the employer could have signed only two consecutive fixed-term contracts, while the third de jure would be transformed into an open-ended contract. Such a limitation was reintroduced in 2003, but only for contracts that concluded after the new regulation was passed. It was not effective in practice, for two reasons: (a) it did not set a maximum period of temporary employment and (b) it could have been easily circumvented by having just a one-month interval between the contracts, which restarted the counting. Additional limitations were brought by the Supreme Court, who found in 2009 11 that a single fixed-term contract of five years could be abusive if it is not justified by any objective circumstances.21 In February 2016, labor code amendment entered into force, which sets the maximum period of fixed- term employment at 36 months (if counted together with the three-month trial period). Additionally, the notice period for dismissal was aligned with the open-ended contract. Limiting the economic incentives to use civil law contracts Commission contracts that constitute the main source of income to the employee have been subject to proportional social contributions since January 2000. However, this obligation was fairly simple to circumvent, because only the first commission contract in the calendar year was subject to obligatory social contributions. It was enough to have one active commission contract on a petty sum, even a fictional one, to be exempted from obligatory contributions for all subsequent contracts.22 Starting from January 2016, social contributions have to be paid for all commission contracts up to the level corresponding to minimum-wage employment contract. This solution was adopted by the parliament in 2014, but its entry into force was set to 2016 in order to allow firms to adjust to the additional costs.. Improving compliance and rule of law New legislation regulating the functioning of the Labor Inspectorate and significantly broadening its competences was adopted in April 2007. In September 2016, a minor change in the labor code entered into force, aimed at effective elimination of so-called ‘first-day-at-work syndrome’. The amendment imposed an obligation to sign the employment contract before the employee starts his or her work, which should improve effectiveness of labor inspection in deterring and fighting the abuses. 2.2. The Italian reforms of the labor market When Prime Minister Monti was appointed in the fall of 2011, the reform process gained a renewed impetus, particularly in the area of social security and the pension system. During the Monti Government, a novel labor reform was launched in 2012, under the supervision of Minister Fornero. Labor law regulation was subject to a broad revision especially with regard to temporary contracts and unemployment benefits. To contrast labor market duality, certain atypical contracts were abolished and the scope of application of labor law was redefined. Hence, the Government decided to endorse the normative principle of ‘economic dependence’, identified by three components: (a) durability of an employment relationship, (b) mono-commissioning: working for one and only one company, and (c) low remuneration (< €18,000 per year). The Fornero Reform succeeded for the first time in revising the rigid dismissal scheme typical of open- ended contracts (introduced in 1970). Under Italian labor law, protection against unfair dismissal was based on Article 18 of the Italian labor code (Statuto dei Lavoratori). To that point, this norm 21Supreme Court decision from October 25, 2007 (II PK 49/07). 22Additionally, annual reports of the Labor Inspectorate show that contracts of result (not subject to social contributions) are often used in place of commission contracts, even when the performance is diligence and not result oriented. 12 represented the backbone of Italian labor regulatory framework. According to the provision, an unfairly dismissed worker was entitled to a full reinstatement into the workplace. The decision on the fairness versus the unfairness of a specific dismissal rested with a judge’s ruling. Fornero Law 92/2012 weakened this regime, establishing a different set of sanctions for unfair dismissal, such as monetary compensation. Therefore, full reinstatement ceased to be the only applicable sanction. Despite its results, the Fornero Reform was considered a ‘missed opportunity’. Its major shortcomings lay in the unclear and complex wording of the law, limited effectiveness of disciplinary and economic dismissals scheme,23 ‘overregulation’ of contracts put in place to reduce precarious employment, and a weak enforcement system (Ichino 2016). After Monti’s technocratic Government, the new center-left Government coalition continued to face pressure to confront the rise in the unemployment rate. Flexicurity,24 as envisioned at the EU level, became the main candidate to reconcile employers’ need for a flexible labor force with employees’ need for employment stability and security. At the center of the academic and political debate came the single employment contract (an open-ended contract where employment protection increases with job tenure), as a means to reduce the ongoing dualism and restore more equity across generations of workers. Reform of labor contracts in Italy to reduce duality In Italy, the overhaul of labor regulations—executed by the Renzi Government25—was primarily aimed at curbing labor market segmentation and fostering employment. Once in office in 2014, Prime Minister Renzi launched an ambitious wide-ranging reform plan in an attempt to boost economic recovery, foster investment opportunities, enhance competitiveness, strengthen social cohesion, and improve public sector efficiency. The Jobs Act (Law n. 183/2014) represents the most comprehensive labor market reform since the introduction of the labor code (Statuto dei Lavoratori) in 1970. The main changes introduced by the Jobs Act to the labor code included: • The redefinition of which work relationships should be governed by labor law (as against contract law) • The creation of a new open-ended contract with increasing protection (“Contratto a tutele crescenti�) • Economic incentives to convert term contracts into open-ended contracts • The reduction in uncertainty and costs for the dismissal of open-ended workers • The elimination of several types of atypical contracts • Review of restrictions on the use of fixed-term contracts and elimination of restrictions on reallocation of workers in the firm • Simplified vouchers to pay ‘casual’ and ‘occasional’ work (mini jobs) 23 Empirical evidence clearly shows that the increased flexibility upon employers to dismiss employees did not bring the expected results of increasing open-ended employment and job security. 24 European Comission Communication on Flexicurity (June 2007), Council Conclusions on Flexicurity (November 2007). 25 Matteo Renzi, Prime Minister of the Government of Italy since 2014. 13 Principle of ‘hetero-organization’ redefines the boundaries of labor law application The principle of ‘economic dependence’ was replaced by the criterion of ‘hetero-organization’. Labor law applies to employment relationships in the following cases: (a) working tasks relate to an activity and not a specific result; (b) tasks are performed personally by the worker, without any other support or collaboration; and (c) the employer has the power to determine the place and time of the performance. Reduction of the number of existing atypical contracts not protected under labor law The reform abolished a number of atypical contracts in order to reduce the fragmentation and labor market duality. The outlawed contracts were: project-related contract (contratto a progetto); an individual joint venture between worker and company, where just labor is contributed to the company (associazione in partecipazione con apporto di lavoro); and ‘job sharing’. The only contract that was not abolished—in the domain of atypical temporary contracts—was the agreement for work that is well defined with regard to duration and tasks under strict requirements (so-called collaborazione coordinata continuativa). New open-ended contract with increasing levels of protection (‘Contratto a Tutele Crescenti’) The Decree no. 81/2015 contains the revised regulation on contractual agreements. The key novelty of this reform consists in a new open-ended contract offering ‘rising levels of protection’ proportional to job tenure (‘Contratto a Tutele Crescenti’). While the open-ended contract is not the only contract available in the labor code, it serves as the default form of employment for new recruits. Employee’s protection increases in conjunction with the length of time worked. This scheme builds on the assumption of growing confidence and trust between employer and employee. In an attempt to encourage employers to adopt this new open-ended contractual agreement, the Italian Government adopted two fundamental policy measures: (a) a set of generous hiring incentives applicable in open- ended employment relationships and (b) a drastic reduction of firing costs for newly established open- ended contracts (see below). Tax incentives as a tool to boost open-ended contracts In an attempt to boost open-ended employment, the Italian Government introduced a generous temporary rebate of non-wage labor costs. These ‘hiring’ incentives covered all new open-ended workers who were not employed on a permanent basis in the semester before the recruitment. An equivalent advantageous treatment was granted in cases of conversion from a fixed-term to an open- ended contract. Under the 2015 Finance Act (the so-called ‘Legge di Stabilità’), employers who resorted to the new open-ended contract—from January 1 to December 31, 2015—could benefit from an exemption on social contributions, for which they would normally be liable, for three full years (36 months) up to an annual maximum of €8,060 per contract. The 2016 Finance Act has reduced 40 percent of the amount of social security contributions. It has allowed for a social contributions exemption applicable only for 24 months from the signature of the contract, but with a maximum amount of €3,250 per year per employee. This measure applies to all open-ended contracts signed from January 1 to December 31, 2016. Another fiscal incentive refers to severance costs in case of dismissal, which are now equivalent in open-ended and fixed-term contracts. Severance costs to be borne by employers are set at a minimum for termination shortly after the recruitment, and gradually increase over time. 14 Reshaping of dismissal rules: reduction of uncertainty, firing costs, and litigation burden The reform also intended to reduce the uncertainty on average expected costs related to layoffs of the existing stock of employees on the open-ended contract. Before the Jobs Act, if a judge ruled in favor of an employee on unfair dismissal cases, overall costs upon the employers could potentially be very high. Over time, this stringent dismissal scheme induced employers to prefer temporary contracts over open- ended ones. The issue of removing the risk of high firing costs has been at the root of a contentious debate in Italy for over 20 years. Trade unions strenuously shielded the rigid system of labor rights protection, as laid out under Article 18 of the labor code (Statuto dei Lavoratori, Law 300/1970). In practice, with the Jobs Act, the Government resolved to circumvent trade unions’ approval for dismissals. The reform has significantly restrained the possibility of employees’ reinstatement, limiting it only to discriminatory dismissals and few cases of disciplinary dismissals. The general rule now establishes that unfair dismissals are compensated with monetary indemnification. Compensation is predetermined by the law and it corresponds to two-monthly salaries every year of service, but with a cap (from a minimum of 4 salaries to a maximum of 24 salaries,). Revised regulations on use of fixed-term contracts and reallocation of workers duties in the firm The Decreto Poletti (Decree 34/2014 converted in Law 16/05/2014 n. 78) has liberalized the use of fixed-term contracts under a reduced set of restrictions. The reform removes the obligation upon the employer to indicate the specific (technical, productive, organizational. or substitutive) reason (the so- called cause) for which fixed-term employment has been stipulated. By eliminating any reference to these reasons, the legislator has developed a system based on increased employer’s discretion to make use of fixed-term contracts. Term contracts however remain limited in three ways: (a) a maximum duration of 36 months with the same employer; (b) a maximum of five contract extensions; and (c) the possibility for the employer (companies with more than five employees) to hire temporary workers up to a maximum of 20 percent of the total number of employees. In case of breach of the fixed percentage, the employer is subject to severe administrative penalties: for each extra worker, the fine amounts to 50 percent of the worker’s salary counted for every month of worked time (if the exceeding worker is limited to one, the percentage is lowered to 20 percent). Additionally, another effect of the reform was the increased flexibility in setting and reorganizing worker duties upon the employer. An eased regulation now consents the transfer of employees from one duty to another, a phenomenon better known as demotion or ‘de-skilling’: when a company’s ‘organizational structure’ undergoes a change, employees can be assigned to perform duties which differ from the original agreement. Work vouchers to pay ‘casual’ and ‘extra’ work (mini jobs) Launched in 2003 but implemented only since 2008, vouchers are hourly tickets introduced by the legislator to regulate ‘casual jobs’. Vouchers allow for paying individual workers per hour, with no need to sign any formal contractual agreement. The current nominal value of the voucher is €10 per hour worked, which includes the contribution in favor of National Institute of Social Welfare (INPS) (13 percent), the contribution to the anti-accident insurance in favor of INAIL (National Institute for Job Insurance) (7 percent), and a share for service management in favor of INPS (5 percent). The net value of each voucher is, therefore, equal to €7.50. Under the Italian labor law, ‘casual jobs’ were originally defined as a form of employment lasting less than 30 days per year and generating no more than €5,000. The recent Jobs Act reform of 2015 has raised this cap up to €7,000 to extend labor protection to otherwise hard-to-regulate employment relationships. Nevertheless, the level of protection remains limited and relations so formalized have many similarities to informal work: employees resorting to 15 vouchers are subject only to the social security contribution rate of 25 percent, but they continue to be classified as unemployed, pay no income tax, and receive no workplace rights or benefits. The new regulation is marked by lower fragmentation, a reduced role for term contracts, and a group of earmarked contracts for the marginal forms of work. The Simplified Labor Code in Italy: process and main features As far back as 2007, a group of labor lawyers started to assess how to simplify the entire bulk of Italian labor legislation. This collaborative project involved the voluntary participation of more than 200 labor lawyers over the following years. The work originated from a thorough assessment of the high complexity, fragmentation, and overregulation of the labor law. Experts agreed on the fact that the ‘hypertrophy’ of the legislation was one of the major causes of rigidity and increased transaction costs of the domestic labor market (Ichino 2016). In 2009, on the occasion of the publication of the EU Decalogue for Smart Regulation, the working group submitted a first draft bill to the Senate with a proposal for a simplified labor law. Although this was not adopted at the time, the idea of introducing the Simplified Labor Code was relaunched by the Italian Government in 2013. This gave a new impetus to the endeavor, and in 2014, a pool of experts from diverse backgrounds (economists, labor lawyers, professors and scholars, labor market experts, and so on) joined forces to propose a deeper simplification of the labor regulatory framework as a whole that combined legal and strong economic underpinnings. Under the coordinating role of the think tank Association for International and Comparative Studies in Labour and Industrial Relations,26 a technical taskforce was supervised by two distinguished and renowned Italian labor lawyers, Pietro Ichino and Michele Tiraboschi. The purpose of this ambitious project was to identify viable solutions to longstanding issues, such as (a) first and foremost, the need to render the legislation comprehensible and accessible to a broader audience, thus not limited to a narrow elite of specialists; (b) second, the importance to reconnect labor law to civil law, with emphasis on the principle of bargaining power in employment relationships; (c) finally, to reshape the labor code more in the guise of the Italian Civil Code, in which just few basic standards and principles are set. As a result, the so-called ‘Labor Code 3.0’, encompassing just 70 articles, was finally drafted. Since the outset, the Simplified Labor Code was meant to incorporate only provisions related to individual employment relationships, thus setting aside collective bargaining and trade unions representation.27 The new text of the Simplified Labor Code was submitted to the Government in February 2014, but it was never finalized by the Renzi Government , which ended in December 2016. Political economy aspects of the reform. By and large, both the Fornero Reform and the Jobs Act took place at a time of unprecedented economic crisis for the country and outside the real of traditional social dialogue. The Fornero Labor Law was passed during the technocratic Government of Mario Monti, and following a sour pension reform. The changes underwent a significant period of consultations, but ultimately the law was passed at a unique time when none of the main political parties would take the political responsibility for it. Moreover, this was the period when trade unions’ suffered an unprecedented fall in popularity in the country, because they were seen as protecting fiercely the rights of the minority of (mostly elder 26 ADAPT is a nonprofit organization of comparative law studies, founded by Professor Marco Biagi www.adapt.it (vedi supra). 27 To be reformed, they require a constitutional review and procedures that are more complex. 16 and male) workers who had been in secure jobs, while companies were shedding tens of thousands of workers. The incumbent Renzi government put labor reform at the center of his political program, which was largely portrayed at disrupting the existing set of guarantees in the name of more job creation and more equal rights for those at the margin of the labor market, especially young people. Although much public debate occurred around the terms of the labor reform, social partners remained largely excluded from the drafting table, while technocratic civil society and academics close to the government played an important role. Key authors of the reforms were bipartisan groups of labor lawyers and prominent economists. The lack of prior social dialogue maintained the political support of the reform fragile. After the fall of the Renzi Government, the major trade unions called for a referendum to re-instate the Just Cause clause in the labor code, and to cancel Job Vouchers. 3. Impacts and implications for Poland 3.1. The (early) effects of the Italian reform: preliminary findings 18 months after the reform A recent report released by the Italian National Institute of Statistics (ISTAT 2016) shows that most labor market indicators improved in the second quarter of 2016, compared with the previous year. As far as labor supply is concerned, total employment grew at a steady rate of +0.8 percent against the previous quarter, with a population of 22,786,000 employed. Open-ended employment has increased by +0.3 percent, fixed-term employment by +3.2 percent, and self- employment by +1.2 percent. Employment rose by 0.5 points, especially regarding age ranges of 15–34 (+0.8 points) and 50–64 (+0.6 points). On a regional basis, the increase is higher in the south (+1.4 percent) in comparison to the center (+0.8 percent) and the north (+0.6 percent). The total amount of hours worked grew by 0.5 percent against the previous quarter and 2.1 percent on an annual basis. This cyclical increase has positively affected both industry (+0.4 percent) and services (+0.6 percent). After experiencing stability in the two previous quarters of 2016, the unemployment rate fell by −0.1 points, reaching 11.5 percent overall; the inactivity rate continues to decline (−0.5 points compared with −0.2 and −0.1 points in the first quarter of 2016 and 2015, respectively). Additionally, promising signals came from youth employment, as demonstrated by a substantial decline (−252,000) in the number of youth NEET. Short-term changes in key indicators cannot serve as evaluation of the reform. It is premature to draw conclusions about the effects of the reform, because of the limited time since its application and the fact that Italy experienced a very limited economic recovery since the reform has started. Moreover, the abovementioned improvements in the labor market monitoring indicators cannot be attributed directly to the change in the labor market reform, without a proper identification strategy. Early economic assessments show moderate short-term effectiveness of the reform. A review of the first studies and statistical analyses up to the end of 2016 suggest that the reform had visible effects on the labor market, although the temporary subsidy of social insurance contributions played an important role in driving the observed short term outcomes: • Relative increase in open ended contracts. Overall, the trends recorded in 2015 and especially 2016 suggest that net employment creation occurred largely through the increase in open- ended contracts with increasing protection (Figure 4). 2015 saw 1,870,959 new open-ended contracts activated, with a net increase by 704,000 units compared to 2014; this contrasts with a modest net change in new temporary contracts by 39,176 units. 17 • An increased transition from temporary and atypical contracts to open-ended contracts. Also in 2015, the probability that a worker would transition to a permanent contract from any other form of temporary or atypical contract after six months increased between 5 and 7 percentage points compared to 2014 (MLPS 2016), albeit from rather low levels. Figure 4: Temporary and open-ended employment trends 2013-2016 in Italy Source: Reproduction from (MLPS 2016), based on administrative data • The decisive role of subsidies to social insurance contributions. The research by Sestito and Viviano (2016) sheds light on the effect of the different mechanisms put in place by the reform, limited to the region of Veneto, to explain these results. By exploiting the different starting periods of the two measures and using firm level data on hires and contracts, the authors could establish that the subsidies to social insurance contributions and the regulatory shock contributed in similar shares to the probability that a temporary worker of being converted to an open-ended contract. On the other hand, the subsidy on social insurance contributions was found to be the main cause for increase in new hires in firms. • The prevalence, in absolute terms, of temporary contracts among new activations. While net changes between 2014 and 2015 increased far more for the open-ended contracts than other contracts, in absolute values term in 2015 open ended contracts constituted 21% of new employment relations (against 16% in 2013). 3.2. Insights for Poland from the Italian labor law reform Reducing duality in labor market outcomes requires levelling different contractual forms in terms of costs, risks and rights. Polish employers enjoy more flexibility of hiring and firing with civil law contracts than labor contracts; thus even after the recent increase in labor contributions on contract of specific task, there is still a significant imbalance between contractual forms that should continue to guide employers’ decisions for lower cost options. Restrictions on the currently low-cost low-risk civil law contracts should be matched a reduction in the cost for firms to hire workers on open-ended labor contracts. Civil law contracts historically have been so flexible as to resemble an informal work relation; this could be one of the factors explaining 18 why formality rates in Poland were always higher than in other emerging economies, or Italy. For the same reason, strong restrictions on the use of civil law contracts in Poland, without any modification to the labor contracts regime, could affect employment or formality for those workers whose marginal labor product is below the one represented by labor contracts. A strategy to offset this risk is to make open-ended labor contracts less expensive. One of the key elements of the reform in Italy was to eliminate the uncertainty that employers faced in case of dismissal of open-ended workers. By stipulating a maximum severance cost that employers would face, and by reducing the scope for court intervention to decide on the appropriateness of an employer’s decision to dismiss a worker, the reform made it much less risky (and costly) to hire workers on open-ended contracts. Up to now, however, the Polish legislation has uniquely focused on aligning (only in part) the cost of civil law contracts with those of temporary labor contracts. Today open-ended contracts in Poland remain implicitly costlier and carry greater uncertainties for employers than temporary contracts or civil law contracts If a clear cost or flexibility advantage remains in favor of a specific contractual form, the legislation must be unequivocal on the limits of its application. Although reducing the number and the dissimilarity among contracts is important, maintaining different contractual forms that can adapt to the nature of different jobs remains a necessity. When conditions between different contracts are clearly not equally advantageous for employers (as between project contracts and term contracts in Italy), the boundaries that define for what jobs can be framed with each contractual form must be extremely clear, and with an economic rationale. Similarly, an explicit definition of boundaries between dependent and independent employment is key to avoid the abuse of self-employed status to hide relations of dependent employment. The Polish labor code as of today continues to lack sufficient clarity for employers to know when civil law contracts can or cannot be used, and what is the definition of dependent employment. The reform of the labor code can be facilitated by other complementary labor policies that affect costs, risks, and vulnerability of workers. Labor contract reform interact with other instruments of the labor market regulation, including minimum wage, unemployment benefit, and activation policies. The Italian experience showed the importance of embedding contractual reforms in broader changes in other institutions, such as unemployment insurance reform, albeit incomplete. In the case of Poland, a reform that makes civil law contracts more costly would be facilitated by strengthening of active labor market policies that increase labor productivity (through on-the job training), that facilitate labor mobility across sectors of the economy (through training for the unemployed or by strengthening intermediation services). Accompanying fiscal and economic incentives can also increase the speed of take-up of new forms of contracts. A better alignment between legal mandates and economic incentives that agents in the labor market face. 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